FTX Collapse: What Happens to Your Crypto?
The investing information provided on this page is for educational purposes only. NerdWallet does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.
It’s November 2022: Do you know where your cryptocurrency is? After the collapse of the exchange FTX this month, it’s a good time for anyone who owns crypto to take stock of their portfolio.
FTX now faces reports that it used customer funds on risky investments that left the crypto exchange in a deep hole. The company halted withdrawals amid the chaos (it later resumed them) and is now entering bankruptcy proceedings that could raise new questions about the status of clients’ assets.
If you’re directly affected by the FTX implosion, you can take several steps to check in on your digital assets. And even if you’re a cryptocurrency owner with no relationship to FTX, the issues raised by the latest turmoil may help you think more clearly about your risk appetite.
Because crypto is regulated by a patchwork of agencies in the United States, investors don’t always have the fallbacks available through traditional financial institutions. These include Federal Deposit Insurance Corp. or Securities Investor Protection Corp. protections.
If you’re concerned that some of your holdings may have gone missing, you can start by gathering any records of your crypto investments, says Miles Fuller, head of government solutions at the crypto tax firm TaxBit.
“The first step is taking stock, and documenting as a customer to the extent possible what you had on what exchange,” says Fuller, a former IRS attorney focusing on virtual currencies. Even if the news is bad, these records could be helpful with attempts to recover funds later.
See if you can withdraw
While FTX resumed withdrawals after a pause last week, there are other risks on the horizon. For example, some crypto businesses with financial relationships to FTX may run into trouble in the future.
BlockFi, which had been in line for a potential acquisition by FTX, cut off withdrawals last week and had not resumed them as of Monday afternoon.
If you can withdraw from your exchange, you’ll want to choose another place to store your cryptocurrency. One option is a dedicated crypto wallet that can keep your assets offline. But if your crypto remains stuck or unaccounted for, you may have to turn to the judicial system for help.
Prepare for bankruptcy court
If you cannot recover your cryptocurrency from a company holding it, the next step might be going to court. FTX has filed for bankruptcy, which means anyone who can establish that the company owes them money will have to get in line to request repayment.
This will be a complex legal situation, as courts may have to decide how to treat individual clients, Fuller says, including where they rank in priority alongside other creditors.
If you’re getting the latest information about what’s going on from social media, you might want to add another news source to your diet: the federal court system. Fuller says it’s a good idea to follow the case and carefully review any information you receive.
“If you’re not comfortable, talk to a professional to assist you,” Fuller says. “Because if you have a decent amount of money — or really any amount of money — you don’t want to forgo any rights you may have.”
Understand your crypto storage
Steve Larsen, the founder of DeFi Steward, a company that helps financial advisors manage crypto, says crypto owners would be well served to take a hard look at how they store their cryptocurrency.
Generally speaking, you can store crypto in a custodial wallet, which a company like a crypto exchange runs. Or you can use a noncustodial crypto wallet, through which you manage access to the information needed to send and receive crypto.
While there are risks to either approach, Larsen said recent events in the space offer a solid argument in favor of greater user control.
“It appears to be riskier to use a private exchange [to] hold your assets rather than take care of them yourself, and follow the best practices that go along with it,” Larsen says.
More From NerdWallet